UWC ratings downgraded on weak performance

HLIB Research said UWC’s core net profit of RM23mil for the first quarter ended Oct 31, 2022, missed expectations, accounting for only 18% of the research house’s and consensus forecasts for the full financial year ending July 31, 2023.

PETALING JAYA: UWC Bhd’s weaker-than-expected start to its new financial year has somewhat dampened sentiment towards the company.

This is evidenced by Hong Leong Investment Bank (HLIB) Research’s move to downgrade its rating for the integrated engineering support services provider.

The brokerage now recommends “hold” with a lower target price of RM4 a share on the counter compared with its previous call of “buy” with a target price of RM4.38.

The revision was to reflect its downward earnings revision for UWC, HLIB Research said, adding that its target price for the company was still pegged to 34 times of estimated earnings for 2023.

“At the current juncture, we think the risk-reward is fair although the ongoing trade intensity may eventually benefit UWC, which provides a one-stop solution as more companies shift productions out of China to avoid import tariffs,” it said in a report yesterday.

HLIB Research said UWC’s core net profit of RM23mil for the first quarter ended Oct 31, 2022 (1Q23), had missed expectations, accounting for only 18% of the research house’s and consensus forecasts for the full financial year ending July 31, 2023 (FY23).

It said the deviation was due to lower-than-expected revenue at RM92mil and earnings before interest, tax, depreciation and amortisation (ebitda) margin.

On a sequential basis, UWC’s turnover for 1Q23 represented a decline of 11% quarter-on-quarter (q-o-q) mainly due to a cyclical transition, as it underwent a strategic shift to gradually adjust itself following the anticipated market direction for longer-term growth.

In turn, its core net profit fell 13% q-o-q as depreciation and amortisation (D&A) was higher by 7% q-o-q.

On an annual basis, UWC’s 1Q23 sales expanded by 22% year-on-year (y-o-y), mainly attributable to its expanded capacity to cater for the growing order book contributed by semiconductor industry development.

However, core earnings were reduced by 1% y-o-y due to lower adjusted ebitda margin of 38% versus 1Q22’s 44%; and higher D&A by 22% y-o-y.

Following the results and considering the prospects of UWC, HLIB Research has lowered its forecast core profit after tax and minority interest for the company by 9% for FY23-FY25.

“UWC is optimistic that demand for semiconductors will continue to be robust, thanks to 5G applications, automotive, smart devices, cloud computing, artificial intelligence and Internet of Things.

“The other contributing factors are the implementation of CHIPS Act in the United States to strengthen the country’s semiconductor manufacturing, design and research; and the introduction of 5G, which has propelled the testers’ market, as 5G devices require high-speed chipset,” it said.